What's lifting the stock market -- and what's missing

With eight trading days left in the month, Wall Street is on track for its biggest monthly advance of 2010.

Stocks rose sharply Monday, pushing key indexes above their summer peaks to end at the highest levels since mid-May.

The Dow Jones industrial average closed up 145.77 points, or 1.4%, to 10,753.62, its best finish since May 13 and surpassing its summer peak of 10,698 on Aug. 9. The Dow now is up 739 points, or 7.4%, for the month.

The market advanced in the absence of any major economic news. It may have helped the mood that the official arbiters of economic cycles, the National Bureau of Economic Research, declared that the recession ended in June 2009. But that should have been no big surprise to Wall Street.

On Tuesday, Federal Reserve policymakers meet and are likely to reiterate that they stand ready to do more to ease credit conditions if the economy weakens again. But no surprise there, either.

Renewed faith in the recovery (such as it is) has underpinned stocks this month after a dismal August.

Fear of another recession had knocked 4.3% off the Dow (charted at left) last month. Now, after a wave of better-than-expected economic reports in recent weeks, “The double-dip conversation has gone by the wayside,” said Art Hogan, chief market analyst at brokerage Jefferies & Co. in Boston.

A jump in corporate takeover activity that began in August also has helped bolster share prices, although that trend could be terrible for the employment outlook longer term. (What was the last merger that resulted in more jobs being created than lost?)

Whatever the motivation has been for lucky equity buyers this month, after three straight winning weeks the market on Monday was carried in large part by sheer momentum, analysts said: Once the Standard & Poor’s 500 index breached the 1,130 mark -- a level where the index had stalled out in rally attempts in June and again in August -- the market basically was goading traders to jump aboard.

The S&P closed up 17.12 points, or 1.5%, to 1,142.71, also the highest since May 13.

But what was missing Monday was what’s been missing all month: high trading volume that would indicate the rally was pulling in a significant number of investors and traders who are sick of sitting on cash earning near zero.

Instead, trading activity was anemic again. “It would have been much more convincing if we’d had some volume,” said Gail Dudack, a veteran technical analyst at Dudack Research Group in New York.

Weak trading action leaves many sidelined investors with the feeling that the rally is just a function of computerized trading programs riding the trend of the moment.

But that was the complaint for much of 2009, too, as the S&P 500 climbed 65% from its bear-market low to the end of the year. Investors who stayed away from the market waiting for trading volume to surge left a lot of money on the table.